A Budget for productivity? Almost...

Following the UK government's Autumn Budget Statement 2017, our November webcast saw Liz Martins, Senior Economist, HSBC, explore the macro-economic themes, and Suren Thiru, Head of Economics at the British Chambers of Commerce, tackle the business-specific elements.

Following the Chancellor's Autumn Budget Statement, economists were uncertain as to whether measures on key areas such as housing development and infrastructure investment could go far enough to lift the OBR's downgraded outlook for growth and productivity.

Growth and productivity

The only thing certain about forecasts is their uncertainty and the Chancellor's message was that “the challenge for us as a nation is to prove them wrong”.

Whilst the webcast audience was almost equally split in a straw-poll on who agreed with the OBR's pessimism, downward growth revisions had been expected by most of the economist community, even if the actual figures proved to be “at the lower end of what we were expecting”.

With the UK facing long-term issues around skills availability, infrastructure and general business investment, the OBR has also revised productivity growth down to zero for this year, with only slight improvements to follow. “The unfortunate implication is that wage growth is lower as well.”

Targets

Whilst the productivity issue “predates the referendum”, the uncertainty surrounding Brexit has kept business investment softer and may now be playing into current negative views.

With less in the way of revenue-raising ideas in this Budget, more borrowing is likely, leaving the OBR to conclude that the deficit will not be eliminated before 2031, 16 years later than the previous Chancellor predicted. However, targets come and go, “and with so many uncertainties, everything could change”.

For now, the economists' broad view is that the often-dependable growth in consumption is also likely to remain sluggish. Whilst we should “never bet against the UK consumer” making a positive impact on the real-world, consumer price inflation is likely to remain above the Bank of England's 2% target, and above wage growth, for some time.

To counter that, although far from consensus amongst economists, and notwithstanding strong currency movements in the interim, May 2018 could see another interest rate rise.

Indeed, even with the Bank of England citing low projected growth levels as “the new speed limit”, it remains more bullish than most on wage growth, and is minded to continue with rises. Whether economic conditions permit it to do so is another matter.

Consumer price inflation is likely to remain above the Bank of England's 2% target, and above wage growth, for some time.

Business impact

The Budget tried to balance competing commercial issues “but ultimately did not shift the dial”. Business rate increases have been blunted slightly this time round, but they remain the number one issue across the UK. The VAT registration threshold, which was expected to shift down, remained at £85,000, giving relief to many small and new businesses who were braced for impact.

Infrastructure investment was seen by the majority in the webcast's second straw-poll as the measure most likely to improve productivity and drive economic growth. Even if the OBR had not factored it into its assumptions for growth and productivity, Budget investment in infrastructure, both physical and digital, will rise to £31bn. There is an important caveat for the government though. “It must work closely with business to make sure the funding goes to the right areas and is completed in the most manageable way.”

For many, it is the upfront costs that can really hurt: business rates, the living wage, the apprenticeship levy, insurance premium tax: all have potentially detracted from investment in recent years, when investment is precisely what is required.

Such issues are “undermining our long-term growth prospects”. True, where financing the growth of innovative UK firms has historically not been as supportive as it could be, the gap will now be filled by the British Business Bank which gained an extra £2.5bn of Budget funding. However, the “underwhelming” nature of this Budget makes it one with which “businesses could not do a great deal”.

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